Introduction:
In a recent development in the case titled ‘Slimline Realty Pvt. Ltd. Vs. Mr. Jigar Bhatt’ the National Company Law Appellate Tribunal (NCLAT), New Delhi has reaffirmed that the proviso to Section 33(5) of the Insolvency and Bankruptcy Code (IBC) is mandatory. The tribunal held that any proceedings initiated by the Liquidator without prior approval from the National Company Law Tribunal (NCLT) are unauthorised and incompetent. However, if post facto approval is subsequently granted, the proceedings become authorised and valid from the date such approval is given.
Facts of the Case:
Reliance Marine & Offshore Ltd. (RMOL/Corporate Debtor) was admitted to the Corporate Insolvency Resolution Process (CIRP) by order dated August 21, 2019. Subsequently, an order for liquidation was passed on December 6, 2021. RMOL had no business operations, physical assets, or employees. Its only asset comprised subscriptions in Non-Convertible Unsecured Bonds of five private limited entities (Appellants herein). These bonds were subscribed to in 2013 and were due for redemption on July 25, 2019.
The Liquidator (Respondent) issued a demand notice to the Appellants—Slimline Realty Pvt. Ltd., Avocado Realty Pvt. Ltd., Budding Mercantile Company Pvt. Ltd., Replenish Realty Pvt. Ltd., and Winsome Realty Pvt. Ltd.—for payment concerning the Non-Convertible Unsecured Bonds subscribed by the Corporate Debtor. The SCC did not approve the Liquidator’s request to initiate proceedings against the Appellants. Nevertheless, on September 30, 2023, the Liquidator filed an application under Section 7, claiming a default of financial debt against the Appellants.
The Liquidator sought ex-post facto approval for the Section 7 applications and other reliefs. The Adjudicating Authority, by order dated February 7, 2024, granted ex-post facto approval to the Liquidator to proceed with the Company Petitions against the Appellants. Aggrieved by this order, the Appellants filed the present appeals.
Legal Questions:
- Whether the statutory requirement under Section 33(5) proviso to obtain prior approval of the Adjudicating Authority by the Liquidator to institute a suit or proceeding on behalf of the Corporate Debtor is mandatory or directory?
- Whether a post facto approval granted by the Adjudicating Authority for proceedings initiated by the Liquidator without obtaining prior approval renders the proceedings authorized/competent?
- Whether the party against whom proceedings are to be instituted must be given an opportunity before approval under Section 33(5) is granted to the Liquidator?
Decision of the Appellate Tribunal:
A. Mandatory or Directory Requirement of Section 33(5) Proviso: The Appellate Tribunal held that the statutory requirement under the proviso to Section 33(5) of the Insolvency and Bankruptcy Code (IBC) to obtain prior approval of the Adjudicating Authority by the Liquidator to institute a suit or proceeding on behalf of the Corporate Debtor is mandatory. Section 33(5) begins with a negative injunction, indicating that no suit or legal proceeding shall be initiated by or against the Corporate Debtor once a liquidation order is passed, except with prior approval from the Adjudicating Authority. The legislative intent is to protect the liquidation estate from unnecessary expenses and legal proceedings. The use of prohibitory and negative language in the provision, despite the absence of specific consequences for non-compliance, underscores its mandatory nature.
B. Effect of Post Facto Approval: The Appellate Tribunal referenced the Hon’ble Supreme Court’s judgment in Bansidhar Shankarlal Vs. Mohd. Ibrahim & Anr. and Erach Boman Khavar Vs. Tukaram Shridhar Bhat & Anr., which interpreted similar provisions in the Companies Act, 1913, and the Companies Act, 1956. It was held that proceedings initiated without leave of the Court are unauthorized but become competent from the date leave is granted. Analogously, in the context of Section 33(5) of the IBC, post facto approval by the Adjudicating Authority renders the proceedings authorized and competent from the date of such approval.
C. Requirement of Notice or Hearing Before Approval: The Tribunal clarified that the scheme under Section 33(5) does not mandate that the Liquidator must provide notice or an opportunity to the party against whom proceedings are to be initiated before seeking approval from the Adjudicating Authority. The primary purpose is to ensure the Adjudicating Authority maintains control over the liquidation estate to prevent unnecessary legal expenses. Thus, the approval process does not necessitate prior notice or hearing for the party against whom proceedings are to be instituted.
Conclusion:
The Appellate Tribunal found no grounds to interfere with the Adjudicating Authority’s order dated February 7, 2024, which granted ex-post facto approval to the Liquidator. The appeals were dismissed, allowing the Liquidator to proceed with the Section 7 applications.
This decision reaffirms the mandatory nature of obtaining prior approval under Section 33(5) of the IBC and clarifies that post facto approval legitimizes proceedings from the date such approval is granted, without the need for a prior hearing of the opposing party.
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